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Friday Financial Five – January 4th, 2013

Friday, January 04, 2013


Through the end of 2012, it was like playing a sport without knowing what the rules were. Participants were just expected to play and find out what the score was later. Thankfully, the referees (Congress) decided to put rules in place just after time expired. The dust has finally settled on the tax portion of negotiations. Spending cuts will have to wait another few months.

Top income tax and estate tax rates go up

The Bush tax cuts were made permanent, with the only change being the top tax rate increasing from 35% to 39.6% for those individuals making over $400,000 and couples making over $450,000. The top estate tax rate jumps from 35% to 40% but couples are still able to protect $10 million from the death tax. This might come as a surprise to wealthy individuals that gifted away $5 million just before year end in anticipation of an exemption reduction.

Investment income surcharge in effect for 2013

Despite some chatter, there were no changes in the investment income surcharge related to President Obama’s new healthcare law. For individuals making $200,000 and couples making over $250,000, the investment tax of 3.8% starts this year. Take note of the possibility of this extra tax when making investment decisions in non-retirement accounts. This might also come into play when considering a Roth conversion.

AMT Patch

One thing the recent deal got right was fixing the Alternative Minimum Tax (AMT). It’s now permanently indexed for inflation. Without a patch, it’s estimated that 34 million taxpayers would have been subject to AMT.

Temporary extensions

Some important tax provisions have been given an extension through 2013. Given the tenuous real estate recovery, probably the most crucial is the tax relief on canceled or forgiven mortgage debt. Also extended were the IRA charitable contribution for those over age 70 ½ and The American Opportunity Tax Credit for education. For teachers, who so often spend their own money getting classrooms ready, the $250 classroom-expenses deduction was extended through 2013.

Dividends and long term capital gains

Somewhat surprisingly, the tax rate for dividends and long term gains will stay capped at 15% for most taxpayers. This will help income investors who depend on dividends to supplement pension and social security in retirement. Those in the highest income tax bracket will see an increase as the rate rises to 20% on both dividends and long term gains.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at [email protected].


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